Before we get started, if you missed our conversation about gold stocks and gold speculations last week, have a read of Doug Casey's thoughts on the subject last week, to which we referred in our article. Doug is a rich source of resource wisdom and was the source for some of our observations last week. A few readers wrote in suggesting we ripped Doug off without giving him credit. As Doug is a friend, we wouldn't rip him off but should have linked back to his site last week.
And on to today...Shouldn't this be an interesting week? "Markets have gone up too much, too soon, too fast," says Nouriel Roubini. The ASX 200 fell nearly 100 points on Friday, or 2.11%. This echoed the previous day's trading in New York.
Friday wasn't so bad on the Dow. But the jobs report released by the U.S. Department of Labor showed 263,000 lost jobs in America and an official unemployment rate of 9.8%.
That rate is undoubtedly much higher, once you figure in people who've given up looking for work but are no longer included in the survey. In fact, the "U-6" figure kept by the Department measures labour "underutilisation" in the economy. And according to that figure, U.S. unemployment is at 17%, nearly twice the figure quoted on Friday.
There have been jobless recoveries from recession before. But you still have to wonder how there can be such a big difference between the stark news in the job market and the behaviour of the stock market. True, economists will tell you that jobs are the last thing to recover from a recession. Businesses don't hire until they are sure everything is in the clear.
And we are often told that stocks lead the economy. The market has priced in a recovery which the labor market will confirm...eventually. At least that's the conventional wisdom. It's reassuring.
But the unconventional wisdom is probably more correct. The unconventional wisdom is that low interest rates (near zero in the U.S.) have driven people out of cash and forced them into higher-yielding and often speculative assets. The biggest obvious beneficiaries of low rates and credit facilities has been financial sector stocks themselves (and presumably their options-laden directors).
The question this week is whether there is any momentum left in that trade. Can easy central bank policies keep stocks going higher? Or has the trade exhausted itself? And if it has, what happens next?
Well, one answer is that you may again see a mini-rally in the U.S. dollar and a fall in common stocks and commodities (oil and gold especially). We'd expect this to a cyclical dollar rally. In the bigger picture (a secular trend) the dollar is toast. But markets do not move in linear fashion. They give and they take. And the dollar may be due.
If we do get a greenback rally, this may pave the way for a higher Aussie gold price. The strength of the Aussie dollar has capped the gold price here in Australia. But we reckon you may get a nice move in the Aussie gold price if the greenback rallies. The question is whether U.S. dollar strength takes gold down too, neutralising the benefit of the weaker Aussie.
How do you sort out the relationship between two currencies, one commodity, and many stocks? It all sounds complicated. That's why we've added another mind to the trading desk here at Daily Reckoning Australia headquarters on Fitzroy Street. Murray Dawes is at the helm of the trading desk today. We'll keep you posted on what he has to say.
One question we'll have for him: what the heck should investors do with Woodside Petroleum (ASX:WPL)? Dow Jones newswires is reporting that over the weekend, Federal Resources and Energy Minister Martin Ferguson awarded permits to explore ten new off-shore oil and gas blocks in the Carnarvon Basin off the Northwest coast of Australia.
Woodside is one of the firms that won a permit. Ferguson said that, "The additional investment in Australia's offshore petroleum exploration sector not only offers exciting potential for petroleum discovery but will ultimately help to further develop our petroleum resource and underpin our security of energy supply,"
The security of Australia's energy supply is exactly the issue our special situations analyst Mike Graham took up in his research about Australia's oil industry. You can find that complete report here. The findings may surprise you.
With respect to Woodside, there are not too many better blue-chip energy stocks in Australia. Unlike the smaller explorers though, the blue chips are valued differently. Adding to their reserves is crucial, so that the company is not inexorably depleting its assets. But the energy blue chips like Woodside are well known by analysts and they are well-traded by institutions.
This, in our mind, makes Woodside a perfect candidate for a Slipstream trade. That is, if we were a full time trader, we'd be looking for a pattern in the stock chart to see where key levels of support and resistance were. But since we don't run the trading desk, we'll ask Murray and see what he says.
Today's thought of the day from John Robb at Global Guerrillas, "The American 'kleptocracy' has run out of steam due to too much debt and is already in the midst of a perpetual depression. Why? The US middle class -- faithful to the cult religion of free markets even while being taken for all they are worth via a 35 year process of substituting debt accumulation for income gains -- is financially broken. If this is even remotely true: is the US headed for Privatopia and the viral spread of Global Guerrillas?"
Substitute "Australia" for "America" and it makes just as much sense, doesn't it?
Dan Denning
for The Daily Reckoning Australia
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Related Articles:
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About the Author
Dan Denning is the author of 2005's best-selling The Bull Hunter (John Wiley & Sons). He began his financial publishing career in 1997 and has covered financial markets form Baltimore, Paris, London and, beginning in 2005 Melbourne. He’s the editor of The Daily Reckoning Australia and the Publisher of Port Phillip Publishing.
Comment by Ross on 6 October 2009:
This gold stock observation was "a keeper" as a twist on the countercyclical narrative. The central tenet of my view of markets in these past 30 years can be found within the lines of Doug Nolan http://www.prudentbear.com/index.php/creditbubblebulletinview?art_id=10283. This for mine is the central point from which all has radiated. Dan and Bill and Mogambo write on gold that it must be so from that same premise.
GDP is itself now a bubble that can't survive without unsustainable debt or funny money stimulus. The ready to burst components of markets and GDP are:
1. Debt (current account deficits & surpluses)
2. Government and taxes
3. Financial services
4. Discretionary consumer goods and services
On investment and gold stocks etc however, a good narrative can still confuse. As reflected here I found some good timing on ERA and DYL but when they reached the "now sexy" point there "speculation" event was run. The most popular narratives reflect "now sexy" timing and unless the credit bubble is safely growing, or there is governmental capacity to successfully bring off Greenspan/Bernanke puts then it is time to switch. Even though I missed it, this past 6 months it has been govt guaranteed banks, but these now all hang on the US domestic economy which has negative credit growth and all the treasury supplied new credit is escaping offshore through hedge funds and merchant banker carry trades. The short-to medium wait for a momentary deleveraging USD bull period and beyond my long ag holds I have interest in only a few stocks with that underlying countercyclical/speculator driver and otherwise I have seen slim pickings recently.
Comment by Joe on 6 October 2009:
Great (single column) article in the Herald Sun today.
I find the 'newspaper' a comic for grownups and do not have much time for it other than a cheap read whilst having a coffee in a bar near where I work. I commute almost 2 hours each way to work and choose to read a weightier journal (Australian) despote the geometric gymnastics required to negotiate it on a v-line train.
I find Leela de Kretser's regular contribution to be excellent (about the only worthwhile effort in the H.S to be honest).
She details more in one column than many (Bolt especially) achieve in a whole page. She is insightful and boldly to the point whilst being informative and not judgmental.
Anyway, back to the point, she remarked on roughly the same. Commenting how deluded the U.S economic psyche is. How, despite bad news, shares rally. How, despite very bad news, shares rally. How, .... You get the picture. Anyway yesterday there was a correction on estimates of U.S employment numbers quoted over the past year, and they were seriously underquoting unemployment just as systematically they were underquoting employment in the 'bull' economic run upto 2008.
She does not understand the correlation between economic indicators and U.S equity sentiments. And I understand her point. Worth a read, and worthy of keeping any eye out normally every Tuesday.
Comment by Nick Marshall on 12 October 2009:
Joe may gain some insight into causality by checking out Robert Prechter's theories on aggregate mood as reflected by the stockmarket indices. In short, news has no effect on the stockmarket - we humans have an inbuilt propensity to see patterns in everything, even though those patterns may only be co-incidental. On any given day you can almost always find an equal amount of good news as bad news. If the market goes up, then the good news caused it and vice versa. This is just post event rationalisation. Human behaviour or mood in aggregate is either optimistic or pessimistic and runs in cycles which are reflected in waves of where stockmarkets are trending up or down. Most often, markets move sideways from which markets eventually breakout one way or the other. Human mood, in aggregate has far reaching consequences and the outcome is eventually displayed in such things as the state of the economy, the willingness to invest or not, the appetite for risk, aggression between peoples, rational thinking or conversely "magical" thinking, trends towards a desire for religion or not and so on. Prechter has some really interesting correlations popular culture like pop music/fashion/car design and the state of the stockmarket. The stockmarket is an early indicator of such changes taking place and is expressed in the waves within waves that Elliott Wave theory covers. Socionomics is the name that Robert Prechter uses for the study of these macro effects on society. The important point, though, is that most people, without the benefit of a socionomic perspective, get the chain of causality back to front.
Comment by Dan on 12 October 2009:
Nick, Prechter assumes that stock markets are human driven. But they aren't as human as most people assume (particularly those we would consider more informed than ourselves). As far as I am aware, the supercomputers trading on the NYSE (which now account for the majority of its trade volume) and, to a lesser extent, other markets, are driven by numerous things, _including_ news reports, but also trend analysis and agenda weightings. Most people are still unaware of their existence.
Market movements in the US now depend on what Goldman Sachs wants, what the Plunge Protection Team wants, what the other major players all want, as determined by the weightings and strategies they plugged into their supercomputer algorithms. This might be influenced by news reports, or board meetings, secret phone conversations or megalomania. Who the hell really knows! It's likely to be influenced by all of them. Gone are the days when stock markets depended on human emotion and knee-jerk reactions. That is a thing of the past. This is how Goldman Sachs managed to make a profit from a declining market. It's only the naive biological masses who are buying and selling inefficiently and (on average) losing money, and they make up for less and less of the money traded. It's a casino where the "deep blue" milks the humans.
The sooner people realize this, the sooner they can make informed choices on their investing strategies.